Goldman MDs and Tracking Stocks

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Congrats Goldman MDs!

For me, as a Goldman Sachs alumnus, the firm's annual ritual of naming new managing directors has been an important seasonal marker of the passage of time, and a reminder of my own mortality and relative lack of worldly achievements, by which I mean money. So it was kind of a relief when Goldman switched to naming MDs every two years, because, you know, half as many reminders. It's like having my birthday on February 29. Anyway here's this year's list. There are 425 of them, and all of them are younger than me? Actually probably like half of them are? More? All of them get paid more than me. Almost one-third are "millennials," though I suspect few of them live in their parents' basements while seeking a career that offers them personal fulfillment and gentle coddling of their self-esteem. A quarter are women, up from 20 percent two years ago. "Investment bankers comprise 23 percent of the class, up from 18 percent two years ago, while the trading division accounts for 24 percent, down from 33 percent in 2013." Seventeen percent "had an engineering role." Managing directors are now a bit rarer than they used to be -- "6.7 per cent of Goldman’s staff, down from 7.4 per cent last year" -- as "We're trying to get the pyramid right." Adjectives used to describe the MD title include "enticing" and "highly coveted," which is better than the merely "coveted" vice-president title but nowhere close to the "hallowed" partnership.

Liberty.

John Malone's Liberty empire is endlessly fascinating, and yesterday it announced an unusually thorough series of reshufflings even for it. Here is Liberty Media's announcement of its plans to reclassify into three common stocks (Liberty Braves Group, Liberty Media Group and Liberty Sirius Group), and here is Liberty Interactive's announcement of its plans to spin off "two newly formed companies to be called CommerceHub, Inc. and Liberty Expedia Holdings, Inc. ('Expedia Holdings') to holders of its Liberty Ventures Group stock," itself a tracker. Bloomberg's Tara Lachapelle writes that "These moves will spur 10 new ticker symbols, spread across multiple share classes." Here are Leslie Picker and Jennifer Saba on the moves. 

Tracking stocks are weird, of course, but as a semi-solution to the conglomerate discount they have a certain appeal. If conglomerates are worth less because investors can't understand their underlying businesses, trackers help investors concentrate on one business at a time. If conglomerates are worth less because of reduced managerial focus, paying business-level managers in their own trackers gives them the right incentive. And if conglomerates are worth less because an option on a basket is worth less than a basket of options -- my favorite explanation -- then trackers don't exactly solve that problem (which is strictly about credit), but sort of look like they do. If you think that the Braves are worth a lot, now you can buy Braves stock without worrying that Sirius will drag down the Braves, and vice versa, whereas before any strong preference for one business could be canceled by worries about another.

Elsewhere in moguls with a history of aggressive tax structuring, "Warren Buffett Has an Image Problem."

China.

It is apparently hard to be a fund manager in China these days:

Fund managers say regulators have been telling them what they like and don’t like via warning letters from stock exchanges to brokers. Piling on buy orders when stocks are rising is bad. Dumping shares when the market is tanking also gets a warning.

Shorting index futures—to bet on falling markets or simply to hedge against stock portfolios—is now frowned upon. Sidney Yu, a hedge-fund manager in Shanghai, said he hasn’t been trading in recent months. “I don’t want to get arrested,” said Mr. Yu, who manages the equivalent of about $188 million in assets.

I have joked sometimes about China's response to stock market volatility, which seems to consist of banning selling, but you can see the philosophical point here. Any time you buy stock, that has two effects: One, it tends to push the price up, and two, you own the stock and benefit from the rising price. (Vice versa for short selling.) But pushing prices around to benefit your own position is the definition of manipulation. So if regulators are looking for market manipulation, any trading at all can be made to look, at least superficially, like possible manipulation. So maybe it's safest not to trade at all.

These are problems that presumably the Chinese capital markets will work out over time, though on the other hand no one is all that clear on what manipulation is in the U.S. or the U.K. either. Elsewhere, China's stock exchanges have doubled margin requirements to "help prevent systemic risks from building in China’s financial system." China's interventions in currency markets have become more subtle. And here is George Magnus on "China's awkward economic transition": "A knowledge-information-innovation economy requires access to information and openness, neither of which are on offer."

People are worried about unicorns.

Here is a story about Sequoia Capital's "scout" program. Sequoia, a leading venture capital fund, recruits startup entrepreneurs to act as "scouts," and gives the scouts money to invest in other startups. Then off they go into the Enchanted Forest of Startup Metaphor, hunting for baby unicorns. If the startups they find do well, the scouts and Sequoia split the money, making the scout program sort of a fund-of-seed-funds or whatever. More importantly, the scouts "keep their eyes and ears open for ideas that Sequoia might like," and hopefully steer good later-stage venture financing to Sequoia. 

You know what I think: Private markets are the new public markets, big venture capital rounds are the new initial public offerings, and getting into an early round by way of a "scout" investment is the new making a pre-IPO investment to get favorable consideration in the IPO. Everything is just being sort of pushed earlier in the process. Part of this is just the inevitable result of competition: If an IPO will be hot, you should invest pre-IPO, which means the pre-IPO rounds will be hot, which means you should invest even earlier, etc. Part of it is about evolutions in market structure, regulation, and technology that allow more efficient private investing. And part of it is about the companies themselves:

Forging tight relationships that generate new deals for venture-capital firms is more important than ever as the cost of creating startups falls. The resulting acceleration in company launches has made it harder for venture-capital firms to identify the best opportunities as startups emerge. And competition is growing as new investors who are flush with capital invade the technology world.

Elsewhere, here is a story about "Angel Labs, a global angel investor academy based in San Francisco whose mission is to widen the influence of angel investing."

NYSE vs. IEX.

We've talked before about IEX's controversial application to become an exchange, and more recently about Citadel's objection to that application, which focused on IEX's order delay and the favoritism it apparently shows to peg orders and to its own router. Here is the New York Stock Exchange's objection, which raises similar issues, but this time with a Seinfeld reference:

“Like the ‘non-fat yogurt’ shop on Seinfeld, which actually serves tastier, full-fat yogurt to increase its sales, IEX advertises that it is ‘A Fair, Simple, Transparent Market,’ whereas it proposes rules that would make IEX an unfair, complex, and opaque exchange,” according to a NYSE letter dated Nov. 12 on the U.S. Securities and Exchange Commission’s website.

Personnel issues.

Here are Jon Henschen and Josh Brown on financial advisors' scores on regulatory exams like the Series 7. Henschen:

Regarding test scores, wirehouse data has concluded that reps that passed in the 70% to 80% range were far more likely to be successful advisors than reps that tested at 90% or above.  Those that scored unusually high generally lacked the social skills necessary to build and maintain a book, and were better suited to becoming CFAs working in more technical roles that require less social interaction.  

Brown:

I chalked it up to the fact that they weren’t deep thinkers, which enabled them to slip further into the necessary brainwashed condition that all successful salespeople must. If you’re thinking too much about something you are supposed to sell, then doubt enters the equation. Doubt lessens the degree of aggression with which you go about your appointed task.

It is somewhat depressing to contemplate a career in which being too smart is a drawback. In other personnel news, "Some of the world’s biggest hedge funds, including Man GLG, Brevan Howard and Tudor Investment Corporation, have been forced to design new training programmes because they can no longer count on attracting seasoned traders from Wall Street and the City of London." 

People are worried about bond market liquidity and swap spreads.

Those worries are collected in this delightful Tracy Alloway piece on "Six Strange Things That Have Been Happening in Financial Markets," along with "fractured repo rates," rising negative basis, four-plus-standard-deviation moves across asset classes, and the volatility of volatility. What a time to be alive, when these are our worries. Imagine telling a medieval peasant that what's keeping you up at night is the divergence between GCF and triparty repo financing rates. Some of these things -- swap spreads, liquidity, fractured repo -- seem to be mostly about how post-crisis bank regulation will shake out, but let me say one thing about swap spreads. Here's Alloway:

At issue is the fact that swap rates—or rates charged for interest rate swaps—have dipped below yields on equivalent U.S. Treasuries, indicating that investors are charging less to deal with banks and corporations than with the U.S. government. Such a thing should never happen, as U.S. Treasuries theoretically represent the "risk-free" rate while swap rates are imbued with significant counterparty risk that should demand a premium.

I grew up thinking of swap rates as sort of long-term Libor; a five-year swap rate is the fixed-rate equivalent of five years of three-month Libor . And I grew up -- in the dark ages before the crisis -- thinking of Libor as the risk-free rate. Meh, sure, it had an element of bank credit, but why would a bank ever default on a derivative? One element of the tightening of swap spreads -- because of capital requirements, because of swap clearing, because of better Libor measurement, etc. -- is that Libor is again starting to look a bit more like a risk-free rate.

Me yesterday.

I wrote about Valeant and Pershing Square and Allergan and insider trading. Elsewhere: "Valeant played a key role in building, operating Philidor RX." And: "Huge Valeant Stake Exposes Rift at Sequoia Fund." (Not Sequoia Capital, the other one.)

Things happen.

"A luxury suite where customers of its Citigold service can drink a free cappuccino, use free office and conferencing space for personal or business meetings and meet with a Citi financial adviser." Fed Weighs Tightening Revolving-Door Curbs. "What trades?" LoanDepot Postpones IPO. How a Company Can Be Both Downgraded and Upgraded. Blackstone's PIPE Smokes LBO Hopes. Hedge Funds + Leverage Are Hot Formula for Canada Pension Plans. Izabella Kaminska on the art market. The Fed’s Ties to the Barbie Doll. A judge used Taylor Swift song puns to dismiss a case against Taylor Swift. "The bank fraud charge relates to Harley’s attempt to deposit two phony $500 million checks purportedly issued by the Federal Reserve Bank of New York into several financial institutions." Dog food. How to Tie Your Shoes.

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To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net